Selecting Business For Long Term
Selecting Businesses for Long Term
Businesses as a whole can be classified into 2 categories.
1)
Price Competitive Business
2)
Durable Competitive Business
Price Competitive Business: Price competitive businesses are
ones where the consumer chooses to purchase goods or services from the company
based on the price they offer it for.
Ex. Metals, Airlines
Durable Competitive Business: Durable competitive businesses
are ones where the consumer chooses to purchase goods or services from the
company based on the quality without worrying much for the price they offer it
for.
Ex. Food Industries
Sartorial Analysis
Banking and Finance
Banking and Finance is the backbone of any country. People, Industries and the Government,
everyone is in need of credits. The lower interest rates will also increase the
credit demand moving forward, therefore allowing banks to increase their
profitability. These are very sensitive
to Country’s Economy. During economic boom or a recession Banking and Finance generally
are the first one to take it on their chins
Information Technology
IT sector further can be diversified into two, one which
manufactures products and the other which provides services. Manufacturing sort
of company becomes a price competitive business because companies will have to
offer products at cheaper rates which will weigh on their profit margins. Ex.
(Phone Companies, Laptop Companies, etc). There can also be certain exceptions
like Microsoft or Apple (Both Apple and Microsoft have Price competitive
advantage as there is very less or no competition). The second part is one
which provides services. If the quality of the services provided is good then
the clients will be ready to pay for the same, therefore in turn it helps the
company to expand their profit margins. But exception is that too much
competition can will restrict companies from expanding margins (Ex. TCS, Infy,
etc)
Airlines
Airlines are a price competitive business. When people want
fly out to any place by plane first they look for price of the tickets. There
is a lot of competition among the airline companies to offer tickets at a
cheaper rate so that they can attract more customers. This in turn will weigh
very largely on company’s profitability. Even during oil price booms these
company’s cannot expand their profitability due to this competition. Therefore
these company’s show very less or almost no growth.
Automobiles
Automobiles are cyclical sector. There won’t be consistency
in their profitability in the short term, but over a long period of time these
company’s tend to grow due to sales growth. These companies usually will have
to spend more on R&D and also slightly affected by the competition, but
over long term sales growth will help in to increase the profitability. This
sector will generally tend to saturation in well developed countries; they are
better bets in developing countries.
Pharmaceuticals
Pharmaceuticals are defensive sector. The sector will be
very consistent in terms of growth. The company needs to spend lot of its
profits on R&D therefore affecting the company’s profitability. The sector
as such will be very consistent in terms of growth. Even the sales volume will generally
remain to be consistent irrespective of economic recession or booms.
Automobiles v/s Pharmaceuticals
Automobiles and Pharmaceuticals both are comparatively slow
growing sectors. Pharma’s always have an upper hand over Automobiles only due
to consistency and unaffected profit growth since Pharmaceuticals are defensive
sectors. The automobile sector can also tend to saturation over a long period
of time.
Metals
Metals are one of the slowest growing sectors. High loans
and heavy interest will drain out almost all the profits. Heavy expenses in
R&D, lower profit margins due to competition and fluctuations in
commodities makes metals one of the worst sectors to put your money into. One
of the exceptions is HindZinc, Complete monopoly helps it to increase its
profit margin even during commodity meltdowns and it being a zero debt company
helps it to retain most of the cash generated, thereby helping the company grow
consistently.
Teleservices
Teleservices are comparatively slow growing sector. It is a
defensive sector and can be both Price competitive as well as durable competitive
business. It is generally volume driven and competition may affect the margins
to a small extent. Companies with high debt are usually better to avoid.
Consumer Non Durables
Consumer Non Durables are Defensive sector and a Durable
Competitive Business much in favour of Food Industries. These companies can
maintain constant margins as they are durable competitive and over a period of
time the increase in volumes will drive up the profits. They aren’t fastest
growing sector one can find on the Street but good Consumer Durable as well and
Consumer Non-Durable companies can offer
good growth and are generally safe bets.
Auto Ancillaries
Auto Ancillaries are sort of defensive sector. The demand
for the Auto-Parts will be there before the sale of automobile and post the sales
too; therefore due to constant demand these companies won’t be hugely affected
by the recessions, and they generally are good bets and these companies are
usually fast growing too.
Sectors with Primary Preference: Banking Technology, Pharma,
Consumer Non-durables
Sectors with Secondary Preference: Automobile, Auto
Ancillaries, Teleservices
Sectors with Least Preference: Air Lines, Metals, Realty
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